Employment Effects of Local Business Taxes

This is the first paper to thoroughly investigate the employment effects of corporate taxation. Higher taxes are theoretically shown to have a negative impact on employment through reduced investments, if labor is regionally mobile. I test this prediction by exploiting the specific setting of the German local business tax, where on average 10% of the 11,441 German municipalities change their tax rate each year. Relying on rich administrative linked employer-employee panel data, I provide non-parametric and parametric evidence that employment declines if corporate tax rates increase. For given wages, a one euro increase in the tax bill of corporate firms leads to a reduction in the wage bill by 30 cents over two years. I show empirically that the negative employment effect is triggered by reduced net investments and that workers are mobile within labor market regions.